The road ahead

Despite a good showing in the first quarter of 2003-04, the company has maintained a conservative outlook on its earnings performance, with much of the revenue growth slated to be back-ended.

These projections show clearly that Satyam continues to be dogged by pricing pressures, low visibility and long sales cycles and declining operating and net margins. With cash and bank balances of nearly Rs 1,578 crore, the only factor which can change the valuation equation is acquisitions. At the end of the fourth quarter, the Satyam management indicated that it is open to, and actively scouting for, inorganic growth opportunities.

Valuation

What is the prospect of fundamentally re-rating the Satyam stock based on future prospects? Infosys trades at a PEM of 20 times its annualised 2003-04 earnings compared to 12 times for Satyam. The performance of Infosys in the first quarter was better than that of Satyam, with a revenue growth of 6.1 per cent and a post-tax earnings growth of 7.4 per cent. And this performance along with the superior management bandwidth of Infosys justifies the higher PEM so far.

But if Satyam improves on its first quarter performance in the coming quarters, there is a possibility of the PEM differential narrowing between these two companies. However, since the Satyam stock has rallied by nearly 18 per cent during the week and the sector's future continues to remain uncertain, it may be prudent for investors to book profits and contemplate re-entry at declines.

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